5) Suppose the economy is initially in long-run equilibrium. Which of the follow

Question

5) Suppose the economy is initially in long-run equilibrium. Which of the following events leads to an increase in the price level and a decrease in real GDP in the short run?

A) A decrease in health insurance premiums paid by firms decreases the cost of employing labor

B) An increase in government transfer payments

C) An increase in the cost of a key input such as oil

D) A sharp fall in stock market prices

6) As a recessionary gap is eliminated through an economy’s self-correcting adjustments process,

A) the equilibrium price level increases and the equilibrium real output decreases

B) the equilibrium price level decreases and the equilibrium real output increases

C) the equilibrium price level and the equilibrium real output increase

D) the equilibrium price level and the equilibrium real output increase

Explanation / Answer

5) Ans: A sharp fall in stock market prices

6) Ans: the equilibrium price level decreases and the equilibrium real output increases.

Explanation:

Recessionary gap is a situation where the real GDP is lower than the potential GDP at the full employment level. Therefore, when this gap is eliminated, real GDP will move towards potential GDP. So, equilibrium output will increase and price level will decrease.

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.